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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
   Form 10-Q x
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2004
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from ____________ to ____________ Commission file number 000-2791    ELECTRIC CITY CORP.  Delaware
(State or other jurisdiction of incorporation or organization)
    
    36-4197337
(I.R.S. Employer Identification No.)
 1280 Landmeier Road, Elk Grove Village, Illinois 60007-2410
(Address of principal executive offices) (847) 437-1666
(Issuers telephone number)    Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes
x    No o Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Exchange Act) Yes
x   No o 40,922,022 shares of the
registrants common stock, $.0001 par value per share, were outstandingas of March 31, 2004.




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ELECTRIC CITY CORP.
FORM 10-Q
For The Quarter Ended March 31, 2004 INDEX  
 PageNumberPart I Financial InformationITEM 1. Financial Statements:Condensed Consolidated Balance Sheets
March 31, 2004 (unaudited) and December 31, 2003
    
    
    1Condensed Consolidated Statement of Operations
Three Months Ended March 31, 2004 and 2003 (unaudited)
    
    
    3Condensed Consolidated Statement of Stockholders Equity
Three Months Ended March 31, 2004 (unaudited)
    
    
    4Condensed Consolidated Statement of Cash Flows
Three Months Ended March 31, 2004 and 2003 (unaudited)
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6ITEM 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
    
    
    14ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    21ITEM 4. Control and Procedures
    
    
    21Part II. Other Information:ITEM 2. Changes in Securities
    
    
    22ITEM 4 Submission of Matters to a Vote of Security Holders
    
    
    23ITEM 6. Exhibits and Reports on Form 8-K
    
    
    23Signatures
    
    
    24Amended and Restated Directors Stock Option PlanCertification of Chief Executive OfficerCertification of Chief Financial OfficerCertification of Chief Executive OfficerCertification of Chief Financial Officer




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PART I - FINANCIAL INFORMATION 
 ITEM 1. Financial Statements ELECTRIC CITY CORP. 
 CONDENSED CONSOLIDATED BALANCE SHEET
 March 312004
    
    December 31,(unaudited)
    
    2003(1)AssetsCurrent AssetsCash and cash equivalents
    
    $
    4,518,221
    
    
    $
    2,467,023Accounts receivable, net
    
    
    1,379,948
    
    
    
    1,450,811Inventories
    
    
    1,274,187
    
    
    
    1,200,146Prepaid expenses and other
    
    
    256,298
    
    
    
    203,870Total Current Assets
    
    
    7,428,654
    
    
    
    5,321,850Net Property and Equipment
    
    
    1,127,259
    
    
    
    1,132,592Deferred Financing Costs
    
    
    251,394
    
    
    
    482,612Cost in Excess of Assets Acquired
    
    
    416,573
    
    
    
    416,573$
    9,223,880
    
    
    $
    7,353,627
 -1-




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ELECTRIC CITY CORP.
CONDENSED CONSOLIDATED BALANCE SHEET March 31,2004
    
    December 31,(unaudited)
    
    2003(1)Liabilities and Stockholders EquityCurrent LiabilitiesCurrent maturities of long-term debt
    
    $
    1,005,017
    
    
    $
    536,809Accounts payable
    
    
    1,131,811
    
    
    
    1,298,821Accrued expenses
    
    
    639,180
    
    
    
    541,588Deferred revenue
    
    
    389,935
    
    
    
    383,308Customer deposits
    
    
    500,000
    
    
    
    511,167Total Current Liabilities
    
    
    3,665,943
    
    
    
    3,271,693Deferred Revenue
    
    
    216,666
    
    
    
    229,166Long-Term Debt, less current maturities, net of unamortized
discount of $125,942 and $241,775 at March 31, 2004 and
December 31, 2003, respectively
    
    
    178,836
    
    
    
    811,836Total Liabilities
    
    
    4,061,445
    
    
    
    4,312,695Stockholders EquityPreferred stock, $.01 par value; 5,000,000 shares authorized
Series A  0 and 2,396,590 shares issued and outstanding
as of March 31, 2004 and December 31, 2003, respectively
    
    
    
    
    
    
    23,966Series C  0 and 233,614 issued and outstanding as of
March 31, 2004 and December 31, 2003, respectively
    
    
    
    
    
    
    2,336Series D  0 and 157,769 issued and outstanding as of
March 31, 2004 and December 31, 2003, respectively
    
    
    
    
    
    
    1,578Series E  217,030 and 0 issued and outstanding as of
March 31, 2004 and December 31, 2003,
respectively (liquidation value of $43,406,000
and $0 at March 31, 2004 and December 31, 2003,
respectively)
    
    
    2,171
    
    
    
    Common stock, $.0001 par value; 120,000,000 shares
authorized, 40,922,022 and 34,342,022 issued as of March
31, 2004 and December 31, 2003, respectively
    
    
    4,094
    
    
    
    3,436Additional paid-in capital
    
    
    54,880,419
    
    
    
    51,376,137Accumulated deficit
    
    
    (49,724,249
    )
    
    
    (48,366,521
    )Total Stockholders Equity
    
    
    5,162,435
    
    
    
    3,040,932$
    9,223,880
    
    
    $
    7,353,627
 See accompanying notes to condensed consolidated financial statements  (1)
    
    Derived from audited financial statements in the Companys annual
report onForm 10-KSBfor the year ended December 31, 2003 -2-




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ELECTRIC CITY CORP. 
 CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS  (Unaudited)
 Three months ended, March 31
    
    2004
    
    2003Revenue
    
    $
    816,242
    
    
    $
    1,150,752ExpensesCost of sales
    
    
    786,009
    
    
    
    1,116,504Selling, general and administrative
    
    
    1,027,639
    
    
    
    1,021,3261,813,648
    
    
    
    2,137,830Operating loss
    
    
    (997,406
    )
    
    
    (987,078
    )Other Income (Expense)Interest income
    
    
    4,364
    
    
    
    1,667Interest expense
    
    
    (364,686
    )
    
    
    (14,107
    )Total other income (expense)
    
    
    (360,322
    )
    
    
    (12,440
    )Loss from continuing operations
    
    
    (1,357,728
    )
    
    
    (999,518
    )Discontinued OperationsLoss from discontinued operations
    
    
    
    
    
    
    (244,811
    )
    
    
    
    (244,811
    )Net Loss
    
    
    (1,357,728
    )
    
    
    (1,244,329
    )Plus Preferred Stock Dividends
    
    
    (3,164,021
    )
    
    
    (833,992
    )Net Loss Available to Common Shareholder
    
    $
    (4,521,749
    )
    
    $
    (2,078,321
    )Basic and diluted loss per common share from
continuing operations
    
    $
    (0.13
    )
    
    $
    (0.05
    )Discontinued operations
    
    
    
    
    
    
    (0.01
    )Basic and Diluted Net Loss Per Common Share
    
    $
    (0.13
    )
    
    $
    (0.06
    )Weighted Average Common Shares Outstanding
    
    
    35,551,362
    
    
    
    32,681,886
 See accompanying notes to condensed consolidated financial statements -3-




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ELECTRIC CITY CORP. 
 STATEMENT OF CONDENSED CONSOLIDATED STOCKHOLDERS EQUITY
(Unaudited)
 Series A
    
    Series A
    
    Series C
    
    Series CCommon
    
    Preferred
    
    Preferred
    
    Preferred
    
    PreferredCommon Shares
    
    Stock
    
    Shares
    
    Stock
    
    Shares
    
    StockBalance,December 31, 2003
    
    
    34,342,022
    
    
    $
    3,436
    
    
    
    2,396,590
    
    
    $
    23,966
    
    
    
    233,614
    
    
    $
    2,336Issuance of common stock (net
of offering costs of $796,363)
    
    
    5,000,000
    
    
    
    500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Conversion of Series A Preferred Stock
    
    
    1,450,000
    
    
    
    145
    
    
    
    (145,000
    )
    
    
    (1,450
    )
    
    
    
    
    
    
    Redemption of preferred stock
    
    
    
    
    
    
    
    
    
    
    (514,375
    )
    
    
    (5,144
    )
    
    
    
    
    
    
    Exchange of preferred stock
    
    
    
    
    
    
    
    
    
    
    (1,737,215
    )
    
    
    (17,372
    )
    
    
    (233,614
    )
    
    
    (2,336
    )Cumulative dividends on preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Satisfaction of accrued dividends through
the issuance of preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Conversion of term note
    
    
    130,000
    
    
    
    13
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss for the three months ended
March 31, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance,March 31, 2004
    
    
    40,922,022
    
    
    $
    4,094
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
   [Continued from above table, first column(s) repeated] Series D
    
    Series D
    
    Series E
    
    Series E
    
    Additional
    
    
    
    
    
    TotalPreferred
    
    Preferred
    
    Preferred
    
    Preferred
    
    Paid-in
    
    Accumulated
    
    StockholdersShares
    
    Stock
    
    Shares
    
    Stock
    
    Capital
    
    Deficit
    
    EquityBalance,December 31, 2003
    
    
    157,769
    
    
    $
    1,578
    
    
    
    
    
    
    $
    
    
    
    $
    51,376,137
    
    
    $
    (48,366,521
    )
    
    $
    3,040,932Issuance of common stock (net
of offering costs of $796,363)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,203,137
    
    
    
    
    
    
    
    10,203,637Conversion of Series A Preferred Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,305
    
    
    
    
    
    
    
    Redemption of preferred stock
    
    
    (24,087
    )
    
    
    (241
    )
    
    
    
    
    
    
    
    
    
    
    (6,994,621
    )
    
    
    
    
    
    
    (7,000,006
    )Exchange of preferred stock
    
    
    (133,682
    )
    
    
    (1,337
    )
    
    
    210,451
    
    
    
    2,105
    
    
    
    18,940
    
    
    
    
    
    
    
    Cumulative dividends on preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (657,900
    )
    
    
    
    
    
    
    (657,900
    )Satisfaction of accrued dividends through
the issuance of preferred stock
    
    
    
    
    
    
    
    
    
    
    6,579
    
    
    
    66
    
    
    
    657,834
    
    
    
    
    
    
    
    657,900Conversion of term note
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    275,587
    
    
    
    
    
    
    
    275,600Net loss for the three months ended
March 31, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,357,728
    )
    
    
    (1,357,728
    )Balance,March 31, 2004
    
    
    
    
    
    $
    
    
    
    
    217,030
    
    
    $
    2,171
    
    
    $
    54,880,419
    
    
    $
    (49,724,249
    )
    
    $
    5,162,435
 See accompanying notes to condensed consolidated financial statements. -4-




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ELECTRIC CITY CORP. 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited) Three months ended March 31
    
    2004
    
    2003Cash Flow from Operating ActivitiesNet loss
    
    $
    (1,357,728
    )
    
    $
    (1,244,329
    )Adjustments to reconcile net loss to net cash used in
operating activities, net of asset disposalsDepreciation and amortization
    
    
    14,208
    
    
    
    45,015Provision for bad debt
    
    
    239
    
    
    
    5,726Warrants issued in exchange for services received
    
    
    
    
    
    
    58,500Amortization of deferred financing costs
    
    
    231,218
    
    
    
    Amortization of original issue discount
    
    
    115,834
    
    
    
    Accrued interest converted to common stock
    
    
    4,737
    
    
    
    Changes in assets and liabilities, net of dispositionsAccounts receivable
    
    
    70,624
    
    
    
    (87,718
    )Inventories
    
    
    (74,041
    )
    
    
    139,996Other current assets
    
    
    (52,428
    )
    
    
    (51,701
    )Accounts payable
    
    
    (167,010
    )
    
    
    204,160Accrued expenses
    
    
    97,592
    
    
    
    (254,036
    )Deferred revenue
    
    
    (5,873
    )
    
    
    (12,498
    )Other current liabilities
    
    
    (11,167
    )
    
    
    Net cash used in operating activities
    
    
    (1,133,795
    )
    
    
    (1,196,885
    )Cash Flows Used In Investing ActivitiesPurchase of property and equipment
    
    
    (8,875
    )
    
    
    Net cash provided by (used in) investing activities
    
    
    (8,875
    )
    
    
    Cash Flows Provided by (Used in) Financing ActivitiesPayment on long-term debt
    
    
    (9,763
    )
    
    
    (37,676
    )Preferred stock redemption
    
    
    (7,000,006
    )
    
    
    Proceeds from issuance of common stock
    
    
    11,000,000
    
    
    
    1,000,000Issuance costs related to stock issuances
    
    
    (796,363
    )
    
    
    (95,690
    )Short-swing profit contribution
    
    
    
    
    
    
    798Net cash provided by financing activities
    
    
    3,193,868
    
    
    
    867,432Net Increase (Decrease) in Cash and Cash Equivalents
    
    
    2,051,198
    
    
    
    (329,453
    )Cash and Cash Equivalents, at beginning of period
    
    
    2,467,023
    
    
    
    1,555,904Cash and Cash Equivalents, at end of period
    
    $
    4,518,221
    
    
    $
    1,226,451Supplemental Disclosure of Cash Flow InformationCash paid during the periods for interest
    
    $
    12,106
    
    
    $
    14,143Cash paid during the periods for interest  discontinued operations
    
    
    
    
    
    
    4,577Supplemental Disclosures of Noncash Investing and Financing ActivitiesConversion of convertible debt to common stock
    
    $
    270,863
    
    
    $
    Accrued interest satisfied through the issuance of common stock
    
    
    17,481
    
    
    
    In February and March of 2004, certain holders of Series A preferred
stock converted 145,000 shares of Series A preferred stock into
1,450,000 shares of the Companys common stock.
 See accompanying notes to condensed consolidated financial statements -5-




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Electric City Corp. 
 Notes to Financial Statements
 Note 1  Basis of Presentation The financial information included herein is unaudited; however, such
information reflects all adjustments (consisting solely of normal recurring
adjustments), which, in the opinion of management, are necessary for a fair
statement of results for the interim periods. The results of operations for the three months ended March 31, 2004 and 2003
are not necessarily indicative of the results to be expected for the full year. For further information, refer to the audited financial statements and the
related footnotes included in the Electric City Corp. Annual Report on Form
10-KSB, for the year ended December 31, 2003. Note 2 - Stock-based Compensation At March 31, 2004, the Company had a stock-based compensation plan, which is
more fully described in Note 16 in the Companys Annual Report on Form 10-KSB
as filed on March 31, 2003. The Company applies and intends to continue to
apply the recognition and intrinsic value measurement principles of Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations in accounting for those plans. No
stock-based compensation expense was reflected in the net loss for the three
month periods ended March 31, 2004 or March 31, 2003, as all options granted
under the plan had an exercise price equal to or greater than the market value
of the underlying common stock on the date of the grant. The following table
illustrates the effect on the net loss and earnings per share if the Company
had applied the fair value recognition provisions of SFAS No. 123, Accounting
for Stock-Based Compensation, to stock-based compensation: Three Months EndedMarch 312003
    
    2003Net Loss, as reported
    
    $
    (1,358,000
    )
    
    $
    (1,244,000
    )Deduct: Stock-based employee
compensation expense included in
reported net loss
    
    
    
    
    
    
    Add: Total stock-based employee
compensation (expense) income
determined under fair value based
method for awards (1)
    
    
    (135,000
    )
    
    
    (259,000
    )Net Loss, pro-forma
    
    
    (1,493,000
    )
    
    
    (1,503,000
    )Preferred stock dividends
    
    
    (3,164,000
    )
    
    
    (834,000
    )Net Loss Available to Common Shareholder
    
    $
    (4,657,000
    )
    
    
    (2,337,000
    )Net loss per shareBasic and diluted  as reported
    
    $
    (0.13
    )
    
    $
    (0.06
    )Basic and diluted  pro forma
    
    $
    (0.13
    )
    
    $
    (0.07
    )
   1 All awards refer to awards granted, modified, or settled in fiscal periods beginning after
December 15, 1994  that is, awards for which the fair value was required to be measured and
disclosed under Statement 123. -6-




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Note 3 - Recent Accounting Pronouncements In March, 2004, the FASB issued an exposure document entitled Share-Based
Payment - an amendment of Statements No. 123 and 95 (Proposed Statement of
Financial Accounting Standards). The proposed Statement would eliminate the
ability to account for share-based compensation transactions using APB Opinion
No. 25 and generally require instead that such transactions be accounted for
using a fair-value-based method. This accounting, if approved, will result in
compensation expense charges to our future results of operations. The proposed
Statement, if adopted, would be applied to public entities prospectively for
fiscal years beginning after December 15, 2004, as if all share-based
compensation awards granted, modified, or settled after December 15, 1994, had
been accounted for using the fair-value method of accounting. Retrospective
application of the proposed Statement is not permitted. Note 4  Net Loss Per Share The Company computes loss per share under Statement of Financial Accounting
Standards (SFAS) No. 128 Earnings Per Share, which requires presentation of
two amounts: basic and diluted loss per common share. Basic loss per common
share is computed by dividing loss available to common stockholders by the
number of weighted average common shares outstanding, and includes all common
stock issued. Diluted earnings would include all common stock equivalents.
The Company has not included the outstanding options, warrants or shares
issuable upon conversion of the preferred stock and convertible debt as common
stock equivalents in the computation of diluted loss per share for the three
months ended March 31, 2004 and 2003 because the effect would be antidilutive. The following table sets forth the weighted average shares issuable upon
exercise of outstanding options and warrants and conversion of preferred stock
and convertible debt that are not included in the basic and diluted loss per
share available to common stockholders because to do so would be antidilutive: Three Months EndedMarch 312004
    
    2003Weighted average shares issuable
upon exercise of outstanding
options
    
    
    10,417,895
    
    
    
    10,223,848Weighted average shares issuable
upon exercise of outstanding
warrants
    
    
    9,994,867
    
    
    
    8,664,622Weighted average shares issuable
upon conversion of preferred stock
    
    
    26,940,366
    
    
    
    23,834,970Weighted average shares issuable
upon conversion of convertible debt
    
    
    348,578
    
    
    
    Total
    
    
    47,701,706
    
    
    
    42,723,440
 -7-




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Note 5 - Warranty Obligations The Company warrants to the purchasers of its EnergySaver line of products that
the product will be free of defects in material and workmanship for one year
from the date of installation. The Company records the estimated cost that may
be incurred under its warranties at the time the product revenue is recognized
based upon the relationship between historical and anticipated warranty costs
and sales volumes. The Company periodically assesses the adequacy of its
recorded warranty liability and adjusts the amounts as necessary. While the
Company believes that its estimated liability for product warranties is
adequate and that the judgment applied is appropriate, the estimated liability
for product warranties could differ materially from actual future warranty
costs. Changes in the Companys warranty liability are as follows: Three Months EndedMarch 312004
    
    2003Balance, beginning of year
    
    $
    121,702
    
    
    $
    107,127Warranties issued
    
    
    8,250
    
    
    
    12,250Settlements
    
    
    (3,217
    )
    
    
    (15,932
    )Balance, as of March 31
    
    $
    126,735
    
    
    $
    103,445
 Note 6 - Inventories Inventories consisted of the following: March 31,
    
    December 31,2004
    
    2003Raw materials
    
    $
    508,313
    
    
    $
    496,906Work in process
    
    
    5,850
    
    
    
    12,817Finished goods
    
    
    760,024
    
    
    
    690,423$
    1,274,187
    
    
    $
    1,200,146
 -8-




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Note 7 - Dividends Dividends are comprised of the following: Three Months EndedMarch 312004
    
    2003Accrual of Dividend on Series A Convertible
Preferred
    
    $
    540,705
    
    
    $
    542,798Accrual of Dividend on Series C Convertible
Preferred
    
    
    53,206
    
    
    
    52,911Accrual of Dividend on Series D Convertible
Preferred
    
    
    35,932
    
    
    
    Accrual of Dividend on Series E Convertible
Preferred
    
    
    28,057
    
    
    
    Deemed dividend associated with beneficial
conversion price on shares issued in
satisfaction of convertible preferred dividends
    
    
    638,163
    
    
    
    238,283Deemed dividend associated with the redemption
and exchange of outstanding preferred stock
    
    
    1,860,458
    
    
    
    Deemed dividend associated with change in the
expiration date of warrants to purchase shares
of preferred stock
    
    
    7,500
    
    
    
    Total
    
    $
    3,164,021
    
    
    $
    833,992
 -9-




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Note 8  Business Segment Information The Company organizes and manages its business in two distinct segments: the
Energy Technology segment, and the Building Control and Automation segment. In
classifying its operational entities into a particular segment, the Company
segregated its businesses with similar economic characteristics, products and
services, production processes, customers, and methods of distribution into
distinct operating groups. The Energy Technology segment designs, manufactures and markets energy saving
technologies, primarily to commercial and industrial customers. The principal
products produced and marketed by this segment are the EnergySaver, the Global
Commander and negative power systems under the trade name, Virtual Negawatt
Power Plan or VNPP. This segment is headquartered, and most of its
operations are located, in Elk Grove Village, Illinois. The Building Control and Automation segment, which is comprised of our Great
Lakes Controlled Energy subsidiary, provides integration of building and
environmental control systems for commercial and industrial customers. Great
Lakes Controlled Energy is headquartered in, and operates out of its own
facility, located in Elk Grove Village, Illinois. Prior to fiscal year 2003, the Companys reportable segments included the Power
Management segment, which designed, manufactured and marketed a wide range of
commercial and industrial switching gear and distribution panels. Effective
May 31, 2003, the Company divested this segment, accordingly, the net assets
and operating results have been separately reported as discontinued operations.
Prior year segment information has been restated to reflect corporate costs
previously allocated to the Power Management segment, which will continue
despite the divestiture of the segment. The following is the Companys business segment information: Three Months EndedMarch 312004
    
    2003Revenues:Energy Technology
    
    $
    323,000
    
    
    $
    485,000Building Automation Controls
    
    
    493,000
    
    
    
    677,000Intercompany sales  Energy
Technology
    
    
    
    
    
    
    (5,000
    )Intercompany sales  Building
Control and Automation
    
    
    
    
    
    
    (6,000
    )Total
    
    
    816,000
    
    
    
    1,151,000Operating Loss:Energy Technology
    
    
    (513,000
    )
    
    
    (521,000
    )Building Automation Controls
    
    
    (148,000
    )
    
    
    (129,000
    )Corporate Overhead
    
    
    (377,000
    )
    
    
    (337,000
    )Total
    
    
    (998,000
    )
    
    
    (987,000
    )Interest Expense, net
    
    
    (360,000
    )
    
    
    (13,000
    )Loss from continuing operations
    
    $
    (1,358,000
    )
    
    $
    (1,000,000
    )
 -10-




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March 31, 2004
    
    December 31, 2003Total Assets:Energy Technology
    
    
    7,735,000
    
    
    
    5,824,000Building Automation Controls
    
    
    1,489,000
    
    
    
    1,530,000Total
    
    $
    9,224,000
    
    
    $
    7,354,000
 Note 9  Private Placement and Redemption and Exchange Offer On March 19, 2004, the Company entered into a securities purchase agreement
with a group of four mutual funds managed by Security Benefit Group, Inc.
(Security Benefit), whereby the Company issued to such purchasers, in
exchange for $11,000,000 in gross proceeds, a package of securities that
included 5,000,000 shares of the Companys common stock and 5 year warrants to
purchase 1,750,000 additional shares of common stock at $2.42 per share (the
Common Stock Warrants). The exercise price under the Common Stock Warrants
is subject to adjustment if the Company issues shares of common stock at a
price below the lower of the exercise price or the market price at the time. Also on March 19, 2004, the Company entered into a Redemption and Exchange
Agreement with the holders of its outstanding Series A Convertible Preferred
Stock, Series C Convertible Preferred Stock and Series D Convertible Preferred
Stock (collectively, the Existing Preferred Stock) under which the Company
agreed to redeem 538,462 shares of Existing Preferred Stock at a price of $13
per share (the Redemption) and to exchange shares of its newly authorized
Series E Convertible Preferred Stock (the Series E Preferred) for all
remaining outstanding shares of Existing Preferred Stock (the Exchange) on a
1 for 10 basis (one share of Series E Preferred exchanged for 10 shares of
Existing Preferred Stock). The Company used $7 million of the proceeds from
the issuance of securities to Security Benefit to accomplish the Redemption,
which closed on March 22, 2004. Under the Redemption and Exchange transaction, the Company redeemed 538,462
shares of its outstanding Existing Preferred Stock which were convertible into
5,384,620 shares of common stock, at a price equivalent to $1.30 per common
share, and exchanged 210,451 shares of the new Series E Preferred) for the
remaining 2,104,509 outstanding shares of the Existing Preferred Stock. All of
the Existing Preferred Stock has been cancelled. The Series E Preferred has
substantially the same rights as the shares of Existing Preferred Stock that it
replaced, including:  
    
    special approval rights in respect of certain actions by the
Company, including any issuance of shares of capital stock by the
Company that would have the right to receive dividends or the right to
participate in any distribution upon liquidation which was senior to or
equal to the rights of the Series E Preferred (other than issuances to
pay dividends on the preferred and under certain other limited
exceptions such as conversion of outstanding convertible securities)
and any acquisition, sale, merger, joint venture, consolidation or
reorganization involving the Company or any of its subsidiaries;
    
    a conversion price equivalent to $1.00 per share;
    
    the right to elect up to four directors;
    
    the right to vote with the holders of common stock on an as
converted basis on all matters on which holders of our common stock
are entitled to vote, except with respect to the election of directors
or as otherwise provided by law;
    
    a right of first offer on the sale of equity by the Company in a
private transaction; and -11-




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
    
    anti-dilution protection that would adjust the conversion price in
the event we issue equity at a price which is less than the conversion
price . The Exchange was effected on a 1 for 10 basis: whereas each share of the
Existing Preferred Stock was convertible into 10 shares of Common Stock and had
a liquidation preference of $20 per share, each share of the Series E Preferred
is convertible into 100 shares of Common Stock and has a liquidation preference
of $200 per share. As part of the Exchange, all outstanding warrants to
purchase shares of Series D Convertible Preferred Stock were exchanged for
similar warrants to purchase shares of Series E Preferred, but the expiration
date was extended from June 30, 2004 to October 31, 2004. Such Series E
warrants issued are exercisable for an aggregate of 3,750 shares of Series E
Preferred at a price of $100 per share. They replaced warrants exercisable for
37,500 shares of Series D Preferred at an exercise price of $10 per share. In addition the Existing Preferred Stock carried a dividend rate of 10% payable
at the Companys election in cash or in additional shares of preferred stock
during the first three years following issuance. After the third anniversary
of issuance we were required to pay all dividends in cash and the dividend rate
increased by 1⁄2% every six months until it reached 15%, where it would
remain until the shares were converted or redeemed. The Series E Preferred
carries a 6% dividend that is payable at the Companys election in cash or
additional shares of Series E Preferred for as long as the shares remain
outstanding. The following table summarizes the change in outstanding shares that resulted
from this series of transactions: Number of Shares (1)Prior to
    
    After theTransactions
    
    Transactions
    
    ChangePreferred A
    
    
    22,515,890
    
    
    
    0
    
    
    
    (22,515,890
    )Preferred C
    
    
    2,336,130
    
    
    
    0
    
    
    
    (2,336,130
    )Preferred D
    
    
    1,577,690
    
    
    
    0
    
    
    
    (1,577,690
    )Preferred E
    
    
    0
    
    
    
    21,046,900
    
    
    
    21,046,900Total preferred
    
    
    26,429,710
    
    
    
    21,046,900
    
    
    
    (5,382,810
    )Common stock
    
    
    35,922,022
    
    
    
    40,922,022
    
    
    
    5,000,000Total shares outstanding
    
    
    62,351,732
    
    
    
    61,968,922
    
    
    
    (382,810
    )Total shares issuable under
outstanding options and
warrants
    
    
    19,992,048
    
    
    
    21,742,048
    
    
    
    1,750,000Total shares issued or issuable
    
    
    82,343,780
    
    
    
    83,710,970
    
    
    
    1,367,190
 (1) All shares presented on an as converted basis The dilutive effect of the payment-in-kind dividend on the preferred stock will
be reduced significantly as a result of the Redemption because of the lower
dividend rate on the Series E Preferred stock. Based on the terms and number
of shares of the Existing Preferred outstanding prior to the Redemption and
Exchange, if the Company continued to pay preferred dividends by issuing
additional preferred shares, the Company would have issued shares of preferred
stock convertible into 10,306,790 shares of common -12-




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stock over the next three years, whereas it only expects to issue shares of
Series E preferred convertible into 4,473,919 shares of common stock over the
same period, a reduction of 5,832,871 shares or 56.6%. As part of the Redemption and Exchange, the preferred stockholders agreed to
amend and restate their existing stock trading agreements, effectively
replacing them with a new three year agreement containing volume and price
limitations which become effective on September 8, 2004 after the original
expiration date of September 7, 2004. The Investor Rights Agreement and the
Stockholders Agreement among the Company, the preferred stockholders and
certain other parties were also amended and restated as part of the Redemption
and Exchange, principally to reflect the changes in the outstanding preferred
stock resulting from the transactions. For accounting purposes the Redemption and Exchange transaction was viewed as a
redemption for cash and shares of Series E preferred stock. As a result of the
transaction the Company incurred a non-cash deemed dividend of $1,860,458.
This non-cash deemed dividend was determined by comparing the fair value of the
consideration given (the cash and the market value of the Series E Preferred)
to the carrying value of the Existing Preferred Stock. The fair value of the
consideration given exceeded the carrying value of the Existing Preferred
primarily due to the fact that the market price of the Companys common stock
was higher on the day the Redemption and Exchange transaction closed than it
was when the Existing Preferred Stock was originally issued. The deemed
dividend was recorded as offsetting charges and credits to additional paid-in
capital, without any effect on total stockholders equity. Morgan Keegan & Company, Inc. acted as placement agent for the Company with
respect to the transaction and was paid a placement agent fee of $660,000. The
Stockpage.com was also paid a finders fee of $55,000 related to the
transaction. Other issuance costs related to the transaction totaled $81,363. Note 10  Equity Issuances On January 2, 2004, Laurus Master Funds converted $63,600 of principal on the
Companys Convertible Term Note into 30,000 shares of common stock. On January 28, 2004, Laurus Master Funds converted $207,263 of principal and
$4,737 of accrued interest on the Companys Convertible Term Note into 100,000
shares of common stock. On February 10, 2004, a holder of the Companys Series A Convertible Preferred
Stock converted 45,000 shares of Series A Convertible Preferred Stock into
450,000 shares of common stock. On March 19, 2004, two holders of the Companys Series A Convertible Preferred
Stock converted 100,000 shares of Series A Convertible Preferred Stock into
1,000,000 shares of common stock. On March 19, 2004, the Company entered into a securities purchase agreement
with a group of four mutual funds managed by Security Benefit Group, Inc., as
described in Note 9 above. On March 19, 2004, the Company entered into a Redemption and Exchange Agreement
with the holders of its outstanding Series A Convertible Preferred Stock,
Series C Convertible Preferred Stock and Series D Convertible Preferred Stock
as described in Note 9 above. On April 7, 2004, the Board of Directors declared dividends payable on our
Series E Convertible Preferred Stock for the calendar quarter ending March 31,
2004 to shareholders of record of our Series E Convertible Preferred Stock as
of March 31, 2004. The dividends were paid with 6,579 additional shares of
Series E Convertible Preferred Stock. Each share of Series E Convertible
Preferred Stock is convertible into 100 shares of our common stock. The
Company recorded a non-cash deemed dividend of -13-




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$638,163 related to the issuance of these dividend shares due to the fact that
the conversion price on the dividend shares was lower than the market price of
the Companys common stock on the date of issue. 
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion regarding the Company along with the
Companys financial statements and related notes included in this quarterly
report. This quarterly report, including the following discussion, contains
forward-looking statements that are subject to risks, uncertainties and
assumptions. The Companys actual results, performance and achievements in
2003 and beyond may differ materially from those expressed in, or implied by,
these forward-looking statements. See Cautionary Note Regarding
Forward-Looking Statements. Overview We are a developer, manufacturer and integrator of energy savings technologies,
and building automation systems as well as an independent developer of
scalable, negative power systems. We currently market the EnergySaver, and the
GlobalCommander energy conservation technologies, as well as our independent
development of scalable, negative power systems under the trade name, Virtual
Negawatt Power Plan or VNPP. Electric City is based in Elk Grove Village,
Illinois and is traded on The American Stock Exchange under the symbol ELC.
Our premier energy saving product is the EnergySaver system, which reduces
energy consumed by lighting, typically by 20% to 30%, with minimal reduction in
lighting levels. This technology has applications in commercial buildings,
factories and office structures, as well as street lighting and parking lot
lighting. Combining the technologies of the EnergySaver and GlobalCommander
led to the development of our Virtual Negawatt Power Plan concept, which is
essentially a negative power system which we intend to market primarily to
utilities as a demand response system. It is envisioned that the demand
reduction could be specifically placed across a utility grid targeting
potential hot spots such as particular feeders or substations. We believe
that the Electric City VNPP will be the first demand response system to provide
this level of control to a utility without requiring active customer
participation and without impacting a customers operations or ability to do
business. The VNPP can be developed in conjunction with a utility provider, a
utilitys independent power subsidiary or with other sister companies within a
utility family. In some markets, the VNPP can be developed completely at risk
just as the industry has seen the development of independent power plants or
with a long-term negative power purchase agreement with a utility. We recently
entered into an agreement with Commonwealth Edison (ComEd) to develop the
first 50-megawatt VNPP system, to be located in northern Illinois. We
anticipate that approximately 1,500 EnergySavers will be required to deliver
the 50 megawatts of curtailment envisioned under this contract. We have begun
to install EnergySavers under this program and expect to complete the
installation of units over the next 18 to 24 months. In addition to our
EnergySaver system, we design, install and monitor building control and
environmental systems through our subsidiary Great Lakes Controlled Energy
Corporation (Great Lakes). Results of Operations Our revenues reflect the sale of our products, net of allowances for returns
and other adjustments. Revenues of Electric City and its subsidiary are
generated from the sale of products and services, the vast majority of which
are sold in the U.S. Our cost of goods sold consists primarily of materials and labor. Also
included in our cost of goods sold are freight, charges from third parties for
installation of our products, costs of operating our manufacturing facility,
charges for potential future warranty claims, and royalty costs related to -14-




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EnergySaver sales. Cost of goods sold also includes the wages and expenses of
our engineering group at Great Lakes. Sales and gross profits depend, in part, on the volume and mix of products sold
during any given period. Generally, products that we manufacture have a higher
gross profit margin than products that we purchase and resell. A portion of our operating expense is relatively fixed, such as the cost of our
facilities. Accordingly, an increase in the volume of sales will generally
result in an increase to our gross margins since these fixed expenses do not
increase proportionately with sales. We have not consistently utilized the
manufacturing capacity of our facility and, therefore, believe that the fixed
nature of some of our expenses would contribute to an increase in our gross
margin in future periods if sales volumes increase. In particular we believe
that our facility in Elk Grove Village can support a sales level of EnergySaver
products of approximately $15 million to $20 million per year without a
significant further investment in fixed assets. Selling, general and administrative (SG&A) expenses include the following
components:  
    
    direct labor and commission costs related to our employee sales
force;
    
    expenses related to our non-manufacturing management, supervisory
and staff salaries and employee benefits;
    
    commission costs related to our independent sales representatives
and our distributors;
    
    costs related to insurance, travel and customer entertainment and
office supplies costs and the cost of non-manufacturing utilities;
    
    costs related with marketing and advertising our products;
    
    costs of outside professionals such as lawyers, accountants, and
investor relations professionals;
    
    research and development expenses;
    
    costs related to administrative functions that serve to support the
existing businesses of the Company, as well as to provide the
infrastructure for future growth. Interest expense for continuing operations includes the costs and expenses
associated with working capital indebtedness, the mortgage on our headquarters
building, a convertible term loan, and various auto loans, all as reflected on
our current and prior financial statements. Also included in interest expense
is amortization of the debt discount which includes the fair value of the
warrants issued to Laurus Master Funds, as well as the value of beneficial
conversion feature attributed to the Convertible Term Loan. Also reported as
interest expense is the amortization of deferred financing costs related to the
credit facility with Laurus Master Funds. Three Months Ended March 31, 2004 Compared to Three Months Ended March 31,
2003. Our total revenue for the three-month period ended March 31, 2004 declined
$334,510 or 29.1% to $816,242 as compared to $1,150,752 for the quarter ended
March 31, 2003. Revenue related to EnergySaver sales declined approximately
$141,000, or 32%, to approximately $300,000 for the three months ended March
31, 2004 as compared to approximately $441,000 for the same period in 2003.
EnergySavers unit sales decreased 28% to 33 units during the first quarter of
2004 from 46 units sold during the first quarter of 2003. We believe the
decline in EnergySaver revenue is primarily the result of to managements
decision to shift resources to focus on the Companys new utility initiative,
and in particular the ComEd VNPP. This shift created a lag in revenue due to
the startup of our ComEd VNPP. The ComEd VNPP agreement was finalized during
the third quarter of 2003 and as a result the Companys in house sales
resources have been actively seeking customers to participate in the newly
created program. We began shipment of EnergySavers as part of the ComEd
program late in 2003 with continued shipments during the first quarter of 2004,
but we have not recognized revenue on any of these shipments. -15-




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We are currently negotiating to transfer the ComEd contract to a limited
liability company (the LLC) being created by a Chicago based investment bank.
The LLC will in turn purchase all the equipment installed under the ComEd
program from us and effectively rent the curtailment capacity to ComEd. Under
this arrangement ComEd secures a long-term source of curtailment, which among
other things reduces its requirements for peak generating capacity and provides
a hedge against rising fuel costs, the LLC holds a long-term contract for
curtailment capacity payments from Commonwealth Edison and we receive payment
for the equipment at the time of customer acceptance, thereby reducing our
working capital requirements. We are currently in the process of negotiating
and structuring this transaction and as a result have not yet received a firm
commitment from the investment bank. We are also reviewing revenue recognition
methodologies related to this transaction to determine if we will be able to
recognize revenue at the time we transfer equipment to the LLC, or if we will
be required to recognize revenue as service revenue over a longer period. We
have targeted the second quarter of 2004 for the closing date of this
transaction, at which time if we close we will transfer the first batch of
installed units to the LLC and receive payment on the installed units. After
the first transfer to the LLC, we anticipate transferring newly installed
equipment and receiving payment on a regular basis. The ComEd agreement is
expected to result in sales of approximately 1,500 units over the next 18 to 24
months. EnergySaver shipments are expected to increase significantly,
beginning in the second quarter 2004, primarily as a result of the ComEd
program in combination with continuing and new sales to large scalable
commercial customers including among others, the Chicago Public Schools, and
Xcel Energy. Revenue from the sale of building automation products and services decreased
approximately $178,000, or 27% to $493,000 during the three month period ended
March 31, 2004, from approximately $671,000 recorded in the same period of
2003. Revenue in this segment is recognized as work is completed and material
is delivered to the job site, thus will vary based on the level of activity
during a particular period. This segment completed two of the five long-term
projects it was working on during the fourth quarter of 2003 and anticipates
starting a new project during the second quarter of 2004. We expect the
revenue for this segment to remain largely unchanged in future periods from the
level realized in the most recent quarterly reporting period. Other revenue decreased by approximately $16,000 or 41% to $23,000 during the
three-month period ended March 31, 2004 as compared to the $39,000 recorded
during the same period in 2003. Other revenue includes revenue from the
installation of EnergySavers, freight, and the pro-rata recognition of a one
time payment received for the right to certain EnergySaver distributorships. Cost of sales for the three-month period ended March 31, 2004 declined
$330,495, or 29.6% to $786,009 from $1,116,504 for the three-month period ended
March 31, 2003. Gross profit for the first quarter of 2004 declined $4,015 or
11.7% to $30,233 from $34,248 in the first quarter of 2003, but the gross
margin earned on sales increased to 3.7% during 2004 from 3.0% in 2003. The
decline in gross profit is primarily due to the decline in revenue. In
addition, the Building Automation and Controls segment defers recognition of
all job related profits until the completion of the associated project and did
not complete any long-term projects during the first quarter of 2004. This
segment anticipates completing one of its long-term projects during the second
quarter of 2004, at which time it will recognize any profit associated with the
project. Profits in the EnergySaver business are in part influenced by sales
volume due to the fixed nature of our manufacturing overhead. As sales begin
to increase due to the ComEd project, this fixed overhead will be spread over
more sales, which should contribute to an improvement in the gross margin in
this business segment. SG&A for the three-month period ended March 31, 2004 increased $6,313, or 0.6%
to $1,027,639, from $1,021,326 for the three-month period ended March 31, 2003.
A $134,000 reduction in salary expense was more than offset by increases in
legal and insurance costs. We expect our SG&A expense to increase slightly
over the balance of the year as we add additional headcount to ensure proper
execution of the contracts we recently won. -16-




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Other expense for the three-month period ending March 31, 2004 increased
$347,882, to $360,322 from $12,440 for the three-month period ended March 31,
2003. Interest expense for the three-month period ended March 31, 2004
includes amortization of the deferred issuance costs and debt discount related
to the Laurus convertible term loan totaling $347,052. Interest income of
$4,364 for the first quarter of 2004 was $2,697 higher than that recorded in
the first quarter of 2003 due to higher invested cash balances. Our dividend expense for the first quarter of 2004 increased $2,330,029 to
$3,164,021 from $833,992 for the same period in 2003. We accrued dividends of
$657,900 and $595,709 on our Convertible Preferred Stock during the three-month
periods ended March 31, 2004 and 2003 respectively. The increase in the
dividend accrual was due primarily to an increase in the total shares
outstanding as a result of the issuance of shares of the Series D Convertible
Preferred in June 2003 and the issuance of shares of preferred stock in
satisfaction of accrued dividends. The dividends accrued during the first
quarters of 2004 and 2003 were satisfied through the issuance of 6,579 and
59,571 additional shares of our preferred stock, respectively. We were
required to recognize non-cash deemed dividends of $638,163 and $238,283 on
March 31, 2004 and 2003, respectively due to the fact that the conversion price
on these shares was lower than the market price of our common stock on the date
of issue. The increase in this deemed dividend is primarily the result of the
increased difference in the market price of our common stock relative to the
conversion price of the dividend shares. The closing market price of our stock
on March 31, 2004 was $1.97 as compared to $1.40 on March 31, 2003. In
addition, despite the fact that the redemption and exchange transaction was
favorable for the Company and its common stockholders (see note 9 to the
financial statements), we were required to record a non-cash deemed dividend on
the transaction of $1,860,458. For accounting purposes the transaction, which
closed in March 2004, was viewed as a redemption for cash and shares of Series
E Preferred stock. The non-cash deemed dividend was determined by comparing
the fair value of the consideration given (the cash and the market value of the
Series E Preferred) to the carrying value of the preferred stock that was
redeemed. The fair value of the consideration given exceeded the carrying
value of the existing preferred primarily due to the fact that the market price
of our common stock was higher on the day the redemption and exchange
transaction closed than it was when the existing preferred stock was originally
issued. During the first quarter of 2004 we also incurred a $7,500 deemed
dividend when we agreed to extend the expiration date on warrants to purchase
shares of our Series E Convertible Preferred stock from June 30, 2004 to
October 31, 2004. We agreed to extend these warrants to permit holders who
participated in the redemption and exchange to exercise their warrants without
violating the short swing trading rules of section 16(b) of the Securities Act
of 1934. As is more fully described in Note 9 to our financial statements, we completed
a redemption and exchange offering on March 22, 2004 in which we redeemed
538,462 shares of our outstanding Series A, Series C and Series D Convertible
Preferred Stock (the Existing Preferred), and exchanged the remaining
2,104,509 shares of Existing Preferred into 210,451 shares of a new Series E
Convertible Preferred Stock at the rate of 10 shares of Series E Convertible
Preferred Stock for each share of Existing Preferred. The Existing Preferred
Stock carried a dividend rate of 10% payable at the Companys election in cash
or in additional shares of preferred stock during the first three years
following issuance. After the third anniversary of issuance we were required
to pay all dividends in cash and the dividend rate increased by 1/2% every
six months until it reached 15%, where it would remain until the shares were
converted or redeemed. The Series E Preferred carries a 6% dividend that is
payable at the Companys election in cash or additional shares of Series E
Preferred for as long as the shares remain outstanding. The reduction in the
number of outstanding shares of preferred stock, in combination with the
reduction in the dividend rate, will significantly reduce the dilutive effect
of the payment-in-kind dividend on the preferred stock in future periods. Liquidity and Capital Resources As of March 31, 2004, we had cash and cash equivalents of $4,518,221 compared
to $2,467,023 on December 31, 2003. Our debt obligations as of March 31, 2004
consisted of a convertible secured term -17-




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note of $676,790, a mortgage of $625,000 on our facility in Elk Grove Village
Illinois, and a vehicle loan of approximately $8,000. Our principal cash requirements are for operating expenses, including employee
costs, the costs related to research and development, advertising costs, the
cost of outside services including those providing accounting, legal,
engineering and consulting services, and the funding of inventory and accounts
receivable, and capital expenditures. We have financed our operations since
inception through the private placement of our common stock, preferred stock
and various secured and unsecured loans. Net cash increased $2,051,198 during the first three months of 2004 as compared
to decreasing $329,453 during the same period in 2003. Cash consumed by
operating activities declined 5.3% to $1,133,795 during the first three months
of 2004 as compared to $1,196,885 during the same period in 2003. Cash used to
fund the net loss before changes in working capital, declined $143,596 or
12.7%, to $991,492 during the first three months of 2004 from $1,135,088 during
the same period in 2003. This improvement was primarily the result of the
elimination of discontinued operations. Changes in working capital consumed $142,303 during the first three months of
2004 and $61,797 during the same period of 2003. Declines in accounts
receivable generated $70,624 during the first three months of 2003, while
increases in inventory and other current assets consumed $74,041 and $52,428,
respectively during the same period. The decline in accounts receivable
resulted from receipt of amounts held as retention until completion of larger
Building Automation and Controls projects as well as improved collections and
the slowdown in sales during the quarter. The increases in inventory and other
current assets were both related to the ramp-up in the ComEd program. Included
in inventory are EnergySaver units installed at customer host locations for the
ComEd program for which we have not yet recognized revenue. Other current
assets include installation and shipping costs related to these EnergySaver
units. Declines in accounts payable and deferred revenue and other current
liabilities consumed cash of $167,010, $5,873 and $11,167, respectively during
the three-month period ended March 31, 2004. The decline in accounts payable
is primarily the result of payments by Great Lakes to subcontractors who worked
on projects that were completed in the fourth quarter of 2003. The decline in
accounts payable was partially offset by an increase in accrued expenses during
the quarter, which was related to the accrual of amounts due contractors for
work completed on Building Automation and Controls projects during the
three-month period ended March 31, 2004. An increase in accounts receivable
and other assets of $139,419 during the first quarter of 2003 was offset by a
decline in inventory of $139,996. The increase in accounts receivable was
mostly due to the increase in sales in the Building Automation and Controls
segment while the decline in inventory came primarily from the Energy
Technology segment where we intentionally worked to reduce inventories. The
net effect of changes in accounts payable and accrued expenses during the first
quarter of 2003 was a $49,876 use of cash primarily due to the payment by
Switchboard Apparatus of a large vendor invoice with extended terms for
materials related to a government contract which it was working on. Investing activities consumed cash of $8,875 during the three-month period
ending March 31, 2004, the result of purchases of property and equipment. Financing activities generated cash of $3,193,868 and $867,432 during the
three-month periods ended March 31, 2004 and 2003 respectively. During 2004,
we raised $11,000,000 through the issuance of a package of securities that
included shares of our common stock and 5 year warrants to purchase additional
shares of common stock. We used $7,000,006 of the net proceeds from this
issuance to effectuate a redemption and exchange offer for our Series A, Series
C and Series D Convertible Preferred Stock. We incurred expenses related to
these transactions of $796,363. During the quarter we also made scheduled
principal payments on our mortgage and auto loan of $9,763. During the first
quarter of 2003, we issued a package of securities that included shares of our
common stock and common stock warrants for gross proceeds of $1,000,000. We
incurred issuance costs of $95,690 associated with this private placement.
During the quarter we also made scheduled principal payments of $37,676 on our
long term debt and -18-




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received a payment from a shareholder of $798, which represented the
short-swing profit inadvertently earned when he purchased shares of our stock
within six months of selling shares, which is a violation of section 16(b) of
the Securities Act of 1934. Our mortgage with American Chartered Bank matures on February 1, 2005, at which
time we will owe a balloon payment of $595,000, unless we refinance or extend
the mortgage prior to the maturity. It is our intent to attempt to refinance
the mortgage with American Chartered Bank or another lender prior to the end of
2004. We currently have a $2 million convertible revolving credit facility with
Laurus Master Fund, Ltd. (Laurus). The revolving credit facility provides
for borrowings of up to the lesser of (i) $2 million or (ii) 90% of our
eligible accounts receivable. We have not borrowed under the facility, thus it
remains fully available to the extent of our eligible receivables. As of March
31, 2004 eligible receivables would support borrowings of approximately
$500,000 under the facility. The revolving credit facility expires on
September 11, 2005 and accrues interest at the rate of prime (currently 4.00%)
plus 1.75%. We have the option of paying interest and principal, or prepaying
all or a portion of the advances under each Secured Convertible Revolving Note,
with shares of our common stock at the fixed conversion price of $2.12 per
share, provided that the closing price of our common stock is greater than
$2.43 per share for the 11 trading days immediately proceeding the payment date
and that the shares are registered with Securities and Exchange Commission. We
have filed a registration statement with respect to these shares. In addition,
Laurus has the option to convert all or a portion of the advances under any
Secured Convertible Revolving Note into shares of our common stock at any time,
subject to certain limitations, at a fixed conversion price of $2.12 per share.
The revolving credit facility is secured by a blanket lien on all of our
assets, except for our real estate. Our ability to continue the development, manufacturing and the expansion of
sales of our products, including the EnergySaver, the GlobalCommander, VNPP and
building automation products, will require the continued commitment of
significant funds. The actual timing and amount of our future funding
requirements will depend on many factors, including the amount and timing of
future revenues, our ability to collect our receivables in a timely manner, the
level and amount of our product marketing and sales efforts, the magnitude of
research and development, and our ability to improve margins. In an attempt to move the Company to a position where it can start to generate
positive cash flow our management has set the following key objectives for cash
flow improvement in 2004:  
    
    Successfully execute on the ComEd contract. We believe that this
is important from several different perspectives. First we anticipate
that it will have an immediate positive impact on our cash flow.
Secondly, we believe it will establish Electric City as a leader in
negative power development, thereby supporting VNPP opportunities with
other utilities. And finally we believe it will lead to increased
commercial sales of the EnergySaver as customers who participate in the
ComEd VNPP with operations outside the ComEd territory gain exposure to
the technology. This project is under contract, therefore we are
focusing a great deal of our resources on this project and will be
hiring additional personnel as part of our efforts to keep this project
on schedule.
    
    Increase the profitability of EnergySaver sales. Increasing the
margins earned on EnergySaver sales will also have an immediate and
positive impact on our cash flow. We have seen improvements in
EnergySaver margins over the past two years, but believe that the
product has the potential for significantly higher margins. We believe
that increased volumes that will result from the ComEd program will
lead to higher margins as a result of increased capacity utilization.
In addition, a price increase that we implemented effective January 1,
2004 should also lead to improved profitability of the EnergySaver. -19-




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
    
    Build on the recent project successes at Great Lakes Controlled
Energy to make the Building Controls and Automation business become
profitable. Great Lakes has recently been awarded new business and is
currently working on existing projects that we believe will result in
this segment turning profitable during 2004. This segment must execute
effectively in order to realize the profitability potential of these
projects.
    
    Continue to aggressively manage our costs in order to conserve
cash. While we made significant progress in reducing our costs during
the last two years, we must continue to effectively manage all of our
costs so that they do not negate the anticipated improvement in
profitability in our Energy Technology and Building Automation and
Control segments.
    
    Be prepared to raise additional capital in limited amounts if
necessary to continue to fund operations until the business turns cash
flow positive. Our ability to raise additional capital in the future
will depend a great deal on our ability to make progress toward the
goals outline above. We believe that if we are successful in achieving these priorities we should
have sufficient liquidity to allow us to operate until our operations turn cash
flow positive, hopefully sometime during 2004. Our projections contain certain
key assumptions which may or may not occur. If any of the key assumptions
contained in our projections are proven wrong, we may begin to experience a
liquidity shortage sometime within the next 12 to 18 months which could force
us to scale back our growth plans, or, in the worst case, cease operations. If in the future we find that we need to raise additional capital (which may
require stockholder approval), our existing stockholders will likely experience
dilution of their present equity ownership position and voting rights,
depending upon the number of shares issued and the terms and conditions of the
issuance. Any new equity securities will likely have rights, preferences or
privileges senior to those of our common stock. Cautionary Note Regarding Forward-Looking Statements This discussion includes forward-looking statements that reflect the Companys
current expectations about its future results, performance, prospects and
opportunities. The Company has tried to identify these forward-looking
statements by using words such as may, will, expects, anticipates,
believes, intends, estimates or similar expressions. These
forward-looking statements are based on information currently available to the
Company and are subject to a number of risks, uncertainties and other factors
that could cause the Companys actual results, performance, prospects or
opportunities in the remainder of 2004 and beyond to differ materially from
those expressed in, or implied by, these forward-looking statements. These
risks, uncertainties and other factors include, without limitation, the
Companys limited operating history, the Companys history of operating losses,
customers acceptance of our products, the Companys use of licensed
technologies, risk of increased competition, risk that the Virtual Negawatt
Power Plan concept does not succeed, the Companys commercial scale development
of products and technologies to satisfy customers demands and requirements, the
possible need for additional financing and the terms and conditions of any
financing that is consummated, the limited trading market for the Companys
securities, the possible volatility of the Companys stock price, the
concentration of ownership, and the potential fluctuation in the Companys
operating results. For further information about these and other risks,
uncertainties and factors, please review the disclosures included under the
caption Risk Factors in Electric Citys filings with the Securities and
Exchange Commission. Except as required by Federal securities laws, Electric
City undertakes no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events, changed
circumstances or any other reason, after the date of this document. -20-




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ITEM 3. Quantitative and Qualitative Disclosures About Market Risk The only significant exposure we have to market risk at this time is the risk
of changes in market interest rates. The interest rates on our debt facilities
are variable and change with changes in the prime rate. The interest rate on
our convertible term loan is equal to the prime rate (currently 4.0%) plus
1.75% or 6%, whichever is greater. The interest rate on our mortgage is
equal to the prime rate plus 1/2%. If the prime rate were to increase 1
percentage point, the annual interest cost on the term loan and mortgage would
increase by approximately $11,000. 
 ITEM 4. Controls and Procedures  a.
    
    Evaluation of disclosure controls and procedures. Our chief executive officer and chief financial officer, after evaluating
the effectiveness of the Companys disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934 (the Exchange Act)) as of the end of the period
covered by the report, have concluded that our disclosure controls and
procedures were effective as of the end of the period covered by the
report.  b.
    
    Changes in internal controls. There were no significant changes in our internal controls or in other
factors that could significantly affect the Companys internal controls
during the period covered by the report.  c.
    
    Disclosure controls and procedures. Disclosure controls and procedures are our controls and other procedures
that are designed to ensure that information required to be disclosed by
us in the reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported, within the time periods
specified in the Securities and Exchange Commissions rules and forms.
Disclosure controls and procedures include, without limitation, controls
and procedures designed to ensure that information required to be
disclosed by us in the reports that we file under the Exchange Act is
accumulated and communicated to our management, including our principal
executive officer and principal financial officer, as appropriate to
allow timely decisions regarding required disclosure. -21-




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PART II. OTHER INFORMATION 
 ITEM 2. Changes In Securities  (1)
    
    On January 2, 2004, Laurus Master Funds converted $63,600 of principal on
the Companys Convertible Term Note into 30,000 shares of our common
stock.(2)
    
    On January 28, 2004, Laurus Master Funds converted $207,264 of principal
and $4,736 of accrued interest on the Companys Convertible Term Note into
100,000 shares of our common stock.(3)
    
    On February 10, 2004, Leaf Mountain Company converted 45,000 shares of
Series A Convertible Preferred Stock into 450,000 shares of common stock.(4)
    
    On March 19, 2004, Morgan Stanley Dean Witter Equity Funding, Inc.
converted 95,000 shares of Series A Convertible Preferred Stock into
950,000 shares of common stock.(5)
    
    On March 19, 2004, Originators Investment Plan L.P. converted 5,000
shares of Series A Convertible Preferred Stock into 50,000 shares of
common stock.(6)
    
    On March 19, 2004, we entered into a securities purchase agreement with a
group of four mutual funds managed by Security Benefit Group, Inc.,
whereby we issued to such purchasers, in exchange for $11,000,000 in gross
proceeds, a package of securities that included 5,000,000 shares of the
Companys common stock and 5 year warrants to purchase 1,750,000
additional shares of common stock at $2.42 per share.On March 19, 2004, we entered into a Redemption and Exchange Agreement
with the holders of its outstanding Series A Convertible Preferred Stock,
Series C Convertible Preferred Stock and Series D Convertible Preferred
Stock (collectively, the Existing Preferred Stock) under which we
redeemed 538,462 shares of our outstanding Existing Preferred Stock which
were convertible into 5,384,620 shares of common stock, at a price
equivalent to $1.30 per common share, and exchanged 210,451 shares of our
newly authorized Series E Convertible Preferred Stock (the Series E
Preferred) for the remaining 2,104,509 outstanding shares of the
Existing Preferred Stock (the Exchange) on a 1 for 10 basis (one share
of Series E Preferred exchanged for 10 shares of Existing Preferred
Stock). All of the Existing Preferred Stock has been cancelled. As part
of the Exchange, all outstanding warrants to purchase shares of Series D
Convertible Preferred Stock were exchanged for similar warrants to
purchase shares of Series E Preferred and the expiration date was changed
from June 30, 2004 to October 31, 2004. Such Series E warrants issued
are exercisable for an aggregate of 3,750 shares of Series E Preferred at
a price of $100 per share. They replaced warrants exercisable for 37,500
shares of Series D Preferred at an exercise price of $10 per share.  (7)
    
    On April 7, 2004, the Board of Directors declared dividends payable on
our Series E Convertible Preferred Stock for the calendar quarter ending
March 31, 2004 to shareholders of record of our Series E Convertible
Preferred Stock as of March 31, 2004. The dividends were paid with 6,579
additional shares of Series E Convertible Preferred Stock. Each share of
Series E Convertible Preferred Stock is convertible into 100 shares of our
common stock. No underwriters were involved in any of the transactions described above. All
of the securities issued in the foregoing transactions were issued by us in
reliance upon the exemption from registration available under Section 4(2) of
the Securities Act, including Regulation D promulgated thereunder, in that the
transactions involved the issuance and sale of our securities to financially
sophisticated individuals or -22-




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entities that were aware of our activities and business and financial condition
and took the securities for investment purposes and understood the
ramifications of their actions. The purchasers also represented that they were
accredited investors as defined in Regulation D and/or were acquiring such
securities for investment for their own account and not for distribution. Other
than the shares issued to the Laurus Master Fund pursuant to conversion of
portions of the Convertible Term Note referred to in (1) and (2) above, which
have been registered under the Securities Act of 1933, as amended, all
certificates representing the common stock so issued have a legend imprinted on
them stating that the shares have not been registered under the Securities Act
and cannot be transferred until properly registered under the Securities Act or
an exemption applies. 
 ITEM 4. Submission of Matters to a Vote of Security Holders. The issuance of shares of common stock and warrants to a group of four mutual
funds managed by Security Benefits Group, Inc. and the Redemption and Exchange
transaction described in note (6) to Item 2 Changes In Securities above,
both required the consent of the holders of our Existing Preferred Stock, which
was obtained in connection with both transactions. 
 ITEM 6. Exhibits And Reports On Form 8-K. (a) Exhibits 4.63
    
    
    Amended and Restated Directors Stock Option Plan31.1
    
    
    Certificate of Chief Executive
Officer pursuant to Securities Exchange Act Rules
13a-15(e) and 15d-15(e) as Adopted Pursuant to Section
302 of the Sarbanes-Oxley Act of 200231.2
    
    
    Certificate of Chief Financial
Officer pursuant to Securities Exchange Act Rules
13a-15(e) and 15d-15(e) as Adopted Pursuant to Section
302 of the Sarbanes-Oxley Act of 200232.1
    
    
    Certification of the Chief Executive
Officer of the Corporation Pursuant to Section 1350 of
Chapter 63 of Title 18 of the United States Code
Pursuant to Section 906 of the Sarbanes-Oxley Act of
200232.2
    
    
    Certification of the Chief Financial
Officer of the Corporation Pursuant to Section 1350 of
Chapter 63 of Title 18 of the United States Code
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
 (b) On March 23, 2004, the Company filed a report on
Form 8-K announcing that it had entered into a purchase
agreement with a group of four mutual funds managed by
Security Benefit Group, Inc. through which it raised
$11,000,000, using $7,000,006 of the proceeds to effectuate an
redemption and exchange in which it redeemed a portion of its
outstanding Series A, Series C and Series D Convertible
Preferred Stock (the Existing Preferred) and exchange the
remaining Existing Preferred to shares of newly issued Series
E Convertible Preferred Stock. (c) On May 5, 2004, the Company filed a report on
Form 8-K announcing that it had begun to mail its annual
meeting material and releasing a copy of its letter to
shareholders. -23-




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SIGNATURES In accordance with the requirements of the Securities and Exchange Act of 1934,
the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized. ELECTRIC CITY CORP.:Dated: May 13, 2004
    By:
    /s/ John MitolaJohn MitolaChief Executive Officer (principal
executive officer) Dated: May 13, 2004
    By:
    /s/ Jeffrey MistarzJeffrey MistarzChief Financial Officer (principal
financial and accounting officer) -24-